Taking Performance Management Outside the Four Walls

As competition in the marketplace evolves from company-vs.-company to supply chain-vs.-supply chain, enterprises seeking competitive advantage are extending performance management beyond their four walls to encompass their customers, suppliers and trading partners.

As competition in the marketplace evolves from company-vs.-company to supply chain-vs.-supply chain, enterprises seeking competitive advantage are extending performance management beyond their four walls to encompass their customers, suppliers and trading partners.

[From Supply & Demand Chain Executive, April/May 2004]] Supply chain yarns rarely become the stuff of legends, but the story of cell phone giant Nokia and the lightning bolt is perhaps the exception that proves the rule. In a widely recounted incident, in March 2000 a lightning bolt struck a Philips Electronics semiconductor plant in Albuquerque, N.M., sparking a fire that lasted just long enough  10 minutes or so  to take the facility offline for months. As it happened, both Finnish Nokia and Swedish competitor Ericsson used chips from the same plant in their cell phones, and the shutdown presented a threat to both companies' ability to meet rapidly rising demand for their respective products.

But here's where it gets interesting: Nokia learned of the impending chip shortage in just three days  before Philips even reported the problem  by monitoring production at its European plants. Alerted to the threat, Nokia was able to source the chips from other Philips plants and to redesign the chips so that it could use alternate suppliers in Japan and the United States. Meanwhile, Ericsson learned of the fire only weeks after the fact, too late to avoid a supply disruption. End result: Nokia not only fulfilled its production plans, the Finnish company also seized additional market share, while Ericsson lost market share and eventually outsourced the production of its cell phones.

The moral of the Nokia story, of course, is that early detection of potential supply disruptions is a necessary component of business continuity and disaster recovery planning. However, what is notable in this case is that Nokia did not, in fact, detect the immediate cause of the disruption, the fire and the New Mexico plant shutdown, but rather became aware of trouble only when the reverberations of the bullwhip effect penetrated the four walls of the extended Nokia enterprise. In that sense, this yarn is a testament to the power of internally focused business performance management (BPM) as an enabler of visibility into processes at work within an enterprise.

But imagine if Ericsson had a process in place to monitor operations at the Philips plant more closely and had therefore been able to learn of the disruption within hours, soon enough to take action to preserve its own supply of chips and put its competitor at a disadvantage. In that sense, this tale also suggests that the next level of competitive advantage could come from extended BPM, that is, from driving performance management outside the four walls of your own enterprise to encompass your customers, suppliers and trading partners.

The Case for Extended Business Performance Management

Recent economic trends have strengthened the case for extending business performance management into the supply and demand chain. For instance, Dave Haskins, executive vice president for development at Webplan, which provides solutions that help companies detect and respond to changes in supply and demand, points out that the shift toward greater outsourcing of manufacturing operations has increased the complexity of the supply and demand chain and has made it more difficult to detect and resolve problems within the supply chain. "The need for visibility and the loss of control that companies experience when they outsource has had a significant impact on how they need to compete going forward," Haskins says. "The supply chain, as a key element of how a company competes, has become more important than ever before."

Outsourcing certainly has added a new element of complexity to the supply chain of integrated circuit maker Agere Systems. Based in Allentown, Pa., Agere is a $1.8 billion company with 6,600 employees serving markets ranging from mobile telephones and modems to hard disk drives and digital satellite radio. In years past, the electronics and computing equipment manufacturers that use Agere's components employed vertically integrated supply chains. Demand signals and material flows ran directly between Agere and its customers, encouraging close buyer-supplier collaboration through such initiatives as Total Quality Management and just-in-time (JIT) manufacturing, and allowing for a relatively flexible, responsive supply chain. Buffer stocks resided with the customer.
But that changed when, beginning in the late 1990s, many of Agere's customers began moving toward more horizontally integrated business models. As a new tier of subcontractors, each establishing and holding its own buffer stock, appeared between Agere and its customers, the company began to see degradation in the performance of the collective supply chain, according to Chris Armbruster, director of supply chain strategy at Agere. "There was now another trading partner between us and our customer, and that could really slow down information in both directions," Armbruster says. "Information was now being brokered to us by a subcontractor between us and our customer, rather than from the customer itself."

Specifically, Agere saw a degradation in the speed at which it was receiving demand signals and the quality of the demand signal that it was receiving. "Our experience with a subcontractor between us and the customers is that it would often slow down the information flow by two weeks or more," Armbruster says. Those are 14-plus precious days of latency when you consider that most of Agere's customers are working on a one- or two-week lead time with their own customer base. "When it takes us eight weeks to build a product, there's already a mismatch," says Armbruster. "But if there's a party between us and our customer that's slowing down that demand signal by two weeks, you've lost a big opportunity to be more responsive."

The introduction of subcontractors also affected the quality of the demand signal. For example, when a single customer would use multiple subcontractors, the forecast would suffer from a degree of gamesmanship, as Armbruster explains: "Let's say the end customer had a market upside potential of 30 percent, and that was shared with each of its subcontractors. When Agere eventually saw the demand coming through those subcontractors, each of them was stating the entire market potential upside and hoping that they would get [all the additional demand]. So we would end up seeing 160 percent of demand rather than 130 percent."

With outsourcing taking hold as the business model of choice in its various markets, Agere recognized that it needed to move to a new supply methodology to cope with the information disintermediation and distributed inventory inherent in the horizontal supply model. As a first step, the company initiated a project with one of its large customers in the mass storage sector, a customer that had moved to working with four subcontractors rather than directly with Agere. Under this project, Agere, the subcontractors and the end customer agreed to hold monthly forecast collaboration meetings to set a single overall forecast and a single, centrally located buffer held between Agere and the subcontractors. That reduces the latency in the demand signal reaching Agere, and it reduces the total buffer that the supply chain as a whole must hold. Agere builds to its end customer's direct forecast rather than to the subcontractors' demand, with inventory dispatched to the subcontractors on a just-in-time basis. As Armbruster wrote in a white paper on the project: "Actual shipments are made to short interval pull signals. All the subcontractors need to do is 'call off' inventory 24 to 48 hours before they need it."

Operating under this JIT model, the subcontractors are happy because the system minimizes the inventory that they hold and they get the components that they need when they need them. The end customer is happy because the new system simplified the management of the overall supply chain: The customer now knows how much total inventory is in the supply chain and has the flexibility to dispatch that inventory on a just-in-time basis to whichever subcontractor needs it.º The customer has also seen better delivery performance and responsiveness thanks to better control over the buffers; overall, on-time deliveries (including early shipments) increased to 93 percent, up 25 percentage points. And, of course, Agere has benefited from better visibility into total demand within the supply chain, allowing the company to more than double its inventory turns for finished goods under its JIT program.

Solutions for BPM

Agere's approach to extended business performance management primarily involved a change in process. The principle technology involved, to date, has been a set of tools that the company built in-house to convert spreadsheets with forecast figures from customers into electronic data interchange (EDI) messages that could be sent directly into Agere's back-office systems. Total investment: about $5,000 and 70 person hours.
Other companies have been adopting rather more sophisticated solutions as part of their own initiatives to extend business performance management to their supply and demand chains. Thomas Built Buses, for example, is using a solution from Webplan called RapidResponse that lets several dozen suppliers connect to a central portal to collect information on demand and to provide feedback on supply. Dave Haskins, with Webplan, says that the provider's solution uses the suppliers' feedback to alert Thomas Built when changes occur in supply. Thomas Built can then use the solution to proactively determine which of its own orders might be affected by the change, allowing the company to determine immediately how they might reallocate supply to orders of higher priority or source alternative supplies to meet demand.

Elsewhere, pet food company Hartz Mountain is using a solution from Blue Agave Software to analyze orders coming in from its retail customers as a way of identifying which products may stock out within Hartz's own supply network of plants and distribution centers, according to Keith Belton, vice president of marketing with Blue Agave. Hartz also is using the provider's solution to look at the point-of-sale (POS) data provided on a regular basis to Hartz by its mass merchandiser customers. The solution compares the POS data with information residing in Hartz's own fulfillment, inventory and demand systems, giving the company visibility into which products are in danger of running out in which stores. By working on both the supply and demand sides of the business, privately held Hartz is able to meet retailer's high in-stock requirements and tight order cycle times while also thinning out its own inventory, according to Belton.

On the retail side, companies are applying business performance management principles to address the challenges involved in selling through multiple channels. Best Buy, for instance, is using a distributed order management solution from fulfillment specialist Yantra to manage its supply chain in such a way that it can meet customer demand regardless of channel while minimizing its own inventory requirements. So consumers ordering products online can have the goods shipped to their homes or to a store for pick-up, while customers shopping in the retailer's stores can have out-of-stock products shipped directly to their homes. Rob Sweeney, vice president of product management with Yantra, says that this type of distributed order management solution lets a company like Best Buy compete with lower-price retailers by offering consumers greater convenience, while at the same time helping to reduce the inventory requirements for the company's overall supply chain by, for example, having orders fulfilled directly from suppliers.

Best Practices for BPM in the Supply Chain

What all these implementations of business performance management for the extended supply chain have in common is the increased flow of information among supply chain participants. "If you're going to link your business processes with, say, your suppliers, what you're really talking about is sharing a lot more information, a lot more details about what's going on within your operation, within the part of the business process that you own," says Yantra's Sweeny. More important, the information sharing must be proactive, with participants actively informing partners of supply chain disruptions or opening up their processes so that partners can detect unplanned events. In addition, Sweeny says, that sharing must extend to the metrics that the supply chain partners use to measure success, as well as the goals for those metrics.

What's the hardest part of achieving that level of sharing? "Building the relationships," says Agere's Armbruster, "relationships based on trust. It just takes time." Time to ensure that partners understand how shared information is going to be used, time to establish the processes necessary for protecting sensitive information, and time to build the mechanism for moving the information back and forth between partners. "You've got to be determined," Armbruster emphasizes. "You have to be in it for the long haul, meaning that you can't go in and set up one of these things overnight. It's going to take a series of meetings to get it going, it takes some energy to get it going."

For that reason, Armbruster also believes that senior-level participation and a willingness to be flexible are vital to driving this type of project to completion. Top executive buy-in and support can be particularly helpful in bringing trading partners on board with an initiative, he says. "That has actually helped us to change the way that some of our big customers have thought, and it's provided the right motivation for our trading partners to participate," Armbruster says. And finally, because every supply chain is unique, and every trading partner relationship is unique, effective business performance management requires that all parties be flexible in how they build the processes and mechanisms for collaboration. Concludes Armbruster: "Your IT needs to be flexible, the people in your business need to be flexible, and  unless you're a heavyweight who can demand that everything has to get done a certain way  you'll need an element of customization in your processes and in your human capital to make it work."

Sidebar: Defining Business Performance Management

Wayne Eckerson, director of research with The Data Warehouse Institute (TDWI), in his informative March 2004 report "Best Practices in Business Performance Management: Business and Technical Strategies," defines BPM as "a series of processes and applications designed to optimize the execution of business strategy." The TDWI report focuses on managing performance within a single enterprise, but in thinking about how business performance management can be extended out into the supply and demand chain, it is worth bearing in mind Eckerson's observations that "BPM processes and tools enable good management by making it easier for executives at all levels to identify, communicate and monitor key drivers of business value," and that BPM "bridges the gap" between strategy and execution by improving communication, collaboration, control and coordination throughout an organization. By focusing on BPM, Eckerson concludes, "organizations are better able to exploit market opportunities as they arise and catch operational problems before they escalate out of control."

Eckerson distinguishes between business intelligence (BI) and BPM, writing, "BI is enabling technology, whereas BPM is a business process which leverages BI," and he suggests that BPM describes various applications that companies may already have deployed, such as BI, budgeting, data integration, forecasting, key performance indicator (KPI) reports or scorecards, and planning solutions. For more information on the components that make up the BPM "technology stack," see the article " The Reality of Real-time Performance Management ," in the October/November 2003 issue of Supply & Demand Chain Executive.